OPEC could still hold the Trump card for India

NEW DELHI: US president Donald Trump on Wednesday claimed credit for beating down global oil prices and busting the monopoly of OPEC, the grouping of oil exporting countries.

“If you look at oil prices, they’ve come down very substantially over the last couple of months. That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly,” Trump said in a White House interview.

He did not say why he deserved the credit for the recent drop in oil prices, glossing over the market forces that have knocked off oil from four-year highs and could again spark a price rally as the picture over shipments from Iran become clearer in the days to come.

Notwithstanding Trump’s assertion, OPEC still holds sway over prices as it meets 40% of the world’s oil needs. For India, the grouping’s member countries account for 82% of oil, 75% of natural gas and 97% of LPG (domestic cooking gas) supplies.

Trump may like to project himself as the global ‘Oil Marshal’ with his OPEC bashing but his administration actually depends on the cartel, particularly the grouping’s de-facto leader Saudi Arabia, to offset the impact of its Iran policy. It has often leaned on Saudi Arabia to influence OPEC to raise output to calm oil prices.

No doubt the grouping faces challenge from a rising US production, with latest figure suggesting more than combined production of Saudi Arabia and Russia at over 11 million barrels a day. But cost shipping oil from the US limits its effectiveness as replacement of OPEC supplies, at least majorly for major Asian consumers such as India and China. There are rifts within the grouping too, which are embedded in the West Asina regional politics.

So the grouping may be down but certainly not out and could hit back with a production cut to retain turf. Oil prices have been on the rise since the beginning of this year as OPEC production cut deal, nearly 60% drop in output from Venezuela and nervousness over reimposition of US sanctions on Iran’s oil exports. Global benchmark Brent shot past $82/barrel in September, marking a four-year high, as fear of Iranian shipments going off the market sank in.

In India, which imports 83% of its oil requirement, the impact on fuel prices was amplified by a sharp fall in the rupee value. Rising public anger ahead of key state polls prompted the Narendra Modi government to cut excise on motor fuels and ask state-run fuel retailers to absorb another Re 1 per litre cost to pull down pump prices from lifetime highs. Many states also pruned VAT to provide a total relief of about Rs 5 a litre.

Since then, however, two things have happened. High oil prices and the US-China trade war spooked demand growth and sparked talk of oversupply. Then came the US waiver to eight countries, including India, that make up Iran’s major clients. In between, oil prices tumbled as much as 20% on October 3. But the decline since US officials first announced the waivers last Friday has been around 1%.

This is explained by the surprise waivers to Japan and South Korea. The two had reduced Iranian oil imports to zero but can now resume buying and further help keep Iranian oil in play. This is forcing Saudi Arabia and Russia, which agreed to expand production ahead of Iran sanctions, to rethinking the plan. A clearer picture could emerge when OPEC’s joint ministerial monitoring committee meets this weekend in Abu Dhabi to meet output levels, ahead of next month’s broader meeting in Vienna. If the joint committee recommends pruning production, Trump may have to eat his words.